Page 264 - Accounting Principles (A Business Perspective)

6. Merchandising transactions

Manufacturers Companies that produce goods from raw materials and normally sell them to wholesalers.
Merchandise in transit Merchandise in the hands of a freight company on the date of a physical
inventory.
Merchandise inventory The quantity of goods available for sale at any given time.
Net cost of purchases Net purchases + Transportation-in.
Net income Income from operations + Nonoperating revenues - Nonoperating expenses.
Net purchases Purchases - (Purchase discounts +Purchase returns and allowances).
Net sales Gross sales - (Sales discounts + Sales returns and allowances).
Nonoperating expenses (other expenses) Expenses incurred by a business that are not related to the
acquisition and sale of the products or services regularly offered for sale.
Nonoperating revenues (other revenues) Revenues not related to the sale of products or services
regularly offered for sale by a business.
Operating expenses Those expenses other than cost of goods sold incurred in the normal business
functions of a company.
Operating revenues Those revenues generated by the major activities of a business.
Passage of title A legal term used to indicate transfer of legal ownership of goods.
Periodic inventory procedure A method of accounting for merchandise acquired for sale to customers
wherein the cost of merchandise sold and the cost of merchandise on hand are determined only at the end of
the accounting period by taking a physical inventory.
Perpetual inventory procedure A method of accounting for merchandise acquired for sale to customers
wherein the Merchandise Inventory account is continuously updated to reflect items on hand; this account is
debited for each purchase and credited for each sale so that the current balance is shown in the account at all
times.
Physical inventory Consists of counting physical units of each type of merchandise on hand.
Purchase discount See Cash discount.
Purchase Discounts account A contra account to Purchases that reduces the recorded gross invoice cost
of the purchase to the price actually paid.
Purchase Returns and Allowances account An account used under periodic inventory procedure to
record the cost of merchandise returned to a seller and to record reductions in selling prices granted by a
seller because merchandise was not satisfactory to a buyer; viewed as a reduction in the recorded cost of
purchases.
Purchases account An account used under periodic inventory procedure to record the cost of goods or
merchandise bought for resale during the current accounting period.
Retailers Companies that sell goods to final consumers.
Sales allowance A deduction from original invoiced sales price granted to a customer when the customer
keeps the merchandise but is dissatisfied for any of a number of reasons, including inferior quality, damage,
or deterioration in transit.
Sales discount See Cash discount.
Sales Discounts account A contra revenue account to Sales; it is shown as a deduction from gross sales in
the income statement.
Sales return From the seller's point of view, merchandise returned by a buyer for any of a variety of
reasons; to the buyer, a purchase return.
Sales Returns and Allowances account A contra revenue account to Sales used to record the selling
price of merchandise returned by buyers or reductions in selling prices granted.
Selling expenses Expenses a company incurs in selling and marketing efforts.
Trade discount A percentage deduction, or discount, from the specified list price or catalog price of
merchandise to arrive at the gross invoice price; granted to particular categories of customers (e.g. retailers
and wholesalers). Also see Chain discount.
Transportation-In account An account used under periodic inventory procedure to record inward freight
costs incurred in the acquisition of merchandise; a part of cost of goods sold.
Unclassified income statement Shows only major categories for revenues and expenses. Also called the
single-step income statement.

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